Mortgage payment holiday forbearance framework

In a speech by the Director of Consumer and Retail Policy for the FCA, Nisha Arora, it was outlined how lenders should support borrowers forced into taking mortgage payments holidays during the pandemic.

In the guidance below it sets out expectations for firms on how to support customers and work with them on their finances and repayment plans. While not penalising borrowers it does indicate how lenders will be able to show the mortgage payment holiday arrangements made on their credit file for future reference and to accurately reflect the arrangements made.

The FCA’s response to the pandemic was divided into 3 phases of guidance for lenders.

“Phase 1. We needed to work with you to deliver quick, clear, and simple support that was easy for consumers to understand and easy for firms to operationalise. In essence, this took the form of 3-month payment deferrals for those financially impacted by Covid. Recognising the temporary and exceptional nature of the support, we said the deferral should not result in a negative impact on customers’ credit files.

Phase 2. The first set of guidance lasted for 3 months so with people coming off payment deferrals in June we needed to review our approach. We carried out research to understand the uptake of payment deferrals and whether and what sort of further support might be needed.

We found that a majority of people coming to the end of their initial payment deferral would be able to restart repayments, and some would be able to afford partial repayments, but others would need to continue the support they had.

So it was clear that different people would have different needs. We extended the guidance to 31 October, retained the payment deferral support but shifted away from the earlier blanket approach towards a greater range of support being provided, depending on customers’ needs.

Phase 3. Again this guidance was temporary. So as people moved off their second payment deferrals and as the 31 October deadline was coming closer we needed to assess what if any further support would be needed.

Around 1.8 million people have taken a deferral on a mortgage and around 1.7 million a deferral on a credit card or personal loan. We know that over 80% of people with payment deferrals found them helpful and that many would have struggled without them. A majority of people who took them have been able to repay but a significant number of people will need further support. For those in the subprime markets the future looks particularly uncertain.

We have recently published new guidance on both mortgages and credit, which aims to ensure that both people coming to the end of payment deferrals, and those who are impacted by coronavirus after the current guidance ends on 31 October, get the support they need.

The guidance builds on the existing forbearance framework in our rules and our Principles for Businesses. It sets expectations based on what we consider to be industry good practice in forbearance and debt collection, based on individual circumstances and needs, and importantly that reflect the greater challenges and uncertainties of the pandemic environment.

• First, firms should contact customers at an early stage to provide appropriate support to avoid them getting into difficulty.
• Second, the support should be tailored to meet customers’ needs. With uncertainty driven by public health restrictions and changing economic circumstances, firms will need to show flexibility in the support they offer. Some customers may find themselves in temporary difficulties and will just need short-term support, which might include a further period of no or reduced payments to be able to get back on track. Others will face longer-term difficulties and need different types of support, such as a repayment plan.
• Third, with growing numbers of people showing signs of vulnerability – 1.5 million more adults are showing characteristics of vulnerability since the start of the pandemic – we have emphasised the need for firms to recognise vulnerability and respond to the particular needs of vulnerable customers.
• Fourth, as with our previous guidance, we’ve emphasised the need for lenders to play a role in supporting customers through money guidance, and to signpost or refer customers to debt advice if needed.

Over 80% of people with payment deferrals found them helpful and many would have struggled without them. A majority of people who took them have been able to repay but a significant number will need further support

• Fifth, whilst the ban on repossessions will end on 31 October, we are reminding firms that repossessions should be a last resort and of the need to treat customers fairly. This means that if someone is self-isolating for example, or otherwise affected by a lockdown, and can’t access alternative accommodation or essential goods, lenders should not repossess.
• And, in a shift away from the current guidance, the new guidance makes clear that the support customers receive may be reflected on their credit files in accordance with normal reporting processes. This will help to ensure that lenders have an accurate picture of consumers’ financial circumstances and reduce the risk of unaffordable lending.
• The above expectations apply to both the mortgages and credit guidance. Given the particular complexities and vulnerabilities in the credit market, we have set out additional expectations, based on current industry good practice, to help people get back on track where possible, and to avoid creating significant hardship or a worse debt situation.
• We have set out that once firms have agreed a repayment arrangement with a customer, they should waive or reduce interest, fees and charges to the extent necessary to prevent the balance from escalating. This will help to avoid the debt becoming unmanageable for the customer and make it easier for them to get back on track.
• We have also set out an expectation that firms put in place sustainable repayment arrangements so that consumers can meet their essential expenses and priority debts. And for those with multiple debts, we want firms to take only a fair share of what the consumer can afford. This is to ensure that customers are given a reasonable time and opportunity to pay their debts, and in a way that doesn’t create wider detriment and hardship.”